Economist Jia Kang suggests policymakers should stimulate the economy through spending and dynamic taxation.
By XIN Yuan
With reopening in full steam, recovery is top of the agenda. China is aiming for growth of more than 5 percent this year, but with the economy on pause for two months, there is a lot of catching up to do.
JIA Kang, of the China Academy of New Supply-side Economics, thinks policymakers could and should stimulate the economy through fiscal spending and a dynamic, progressive tax code. He shared some of his thoughts with Jiemian News, the interview has been edited.
Jiemian News: What are your thoughts on all the talk about special treasury bonds?
Jia: Special bonds will certainly help. The pandemic has as much if not more damage to the economy this time than in it did in 2020.
The one trillion yuan raised last time was mainly spent on fighting the pandemic, building infrastructure and supporting important industries. A significant amount has been spent this year in major outbreak areas such as Shanghai, Beijing and Jilin Province, and these places will continue to need money. “New infrastructure” is just as important as roads and bridges.
Jiemian News: Do you think the government should raise the deficit target?
Jia: It might be necessary. The budget targets a deficit of 2.8-percent of GDP this year. This was always going to be tight, even without what happened in the spring. A slightly higher deficit would still be well within the comfort zone of the economy.
Raising the deficit target midyear has its precedent. In 1998, after the Asian financial crisis, the government issued bonds and increased infrastructure spending. It increased the deficit that year, for sure, but the investment paid off later when the economy took off.
China traditionally keeps its deficits at below 3 percent, but special times call for special measures. European countries are spending liberally and we should too.
Jiemian News: How should we help small businesses and preserve jobs?
Jia: No-interest and low-interest loans are the quickest and most effective help that small businesses can get. For those on the verge of bankruptcy, the money can make a life-or-death difference. There are many things to consider. We need a robust, transparent mechanism.
Jiemian News: How will this help the real estate sector?
Jia: Real estate needs more leeway. The crackdowns and restrictions have hit the economy hard. Policymakers are aware of this and are trying to loosen things up a little. Market sentiment is turning but it will still be some time.
Stimulus checks are unlikely because China has 1.4 billion people and it’s just exorbitantly expensive to write a check for everyone. And there is no good reason to give rich people money. A better alternative is to send aid to low-income individuals, in the form similar to America’s food stamps. It spurs spending but is much cheaper than no-strings-attached cash handouts. The fact that it can only be used to buy essential goods also helps prevent fraud and misuse.
Jiemian News: In your new book, identify income inequality as a central problem for the economy. Can tax reforms narrow the gap?
Jia: There are at least four things we can work on.
The first is to make personal income tax more dynamic and progressive so that it better takes care of people’s needs, such as raising children.
Inheritance and gift taxes will close the wealth gap between generations.
The property tax should be written into the law. It’s an effective way to tax the rich to help the poor.
Similarly, we need an effective a consumption tax on luxury goods that reflects the shape of the economy.